Iowa-2019-SF40-Introduced

S.F. 40 Section 1. Section 8.57E, subsection 2, Code 2019, is 1 amended to read as follows: 2 2. Moneys in the taxpayer relief fund shall only be used 3 pursuant to appropriations or transfers made by the general 4 assembly for tax relief , including but not limited to increases 5 in the general retirement income exclusion under section 422.7, 6 subsection 31 , or reductions in income tax rates. 7 Sec. 2. Section 422.5, subsection 3, paragraph a, Code 2019, 8 is amended to read as follows: 9 a. The tax shall not be imposed on a resident or nonresident 10 whose net income, as defined in section 422.7 , is thirteen 11 thousand five hundred dollars or less in the case of married 12 persons filing jointly or filing separately on a combined 13 return, heads of household, and surviving spouses or nine 14 thousand dollars or less in the case of all other persons; 15 but in the event that the payment of tax under this division 16 would reduce the net income to less than thirteen thousand five 17 hundred dollars or nine thousand dollars as applicable, then 18 the tax shall be reduced to that amount which would result 19 in allowing the taxpayer to retain a net income of thirteen 20 thousand five hundred dollars or nine thousand dollars as 21 applicable. The preceding sentence does not apply to estates 22 or trusts. For the purpose of this subsection , the entire net 23 income, including any part of the net income not allocated 24 to Iowa, shall be taken into account. For purposes of this 25 subsection , net income includes all amounts of pensions or 26 other retirement income, except for military retirement pay 27 excluded under section 422.7, subsection 31A , paragraph “a” , 28 or section 422.7, subsection 31B , paragraph “a” , received from 29 any source which is not taxable under this division as a result 30 of the government pension exclusions in section 422.7 , or any 31 other state law. If the combined net income of a husband and 32 wife exceeds thirteen thousand five hundred dollars, neither 33 of them shall receive the benefit of this subsection , and it 34 is immaterial whether they file a joint return or separate 35 -1- LSB 1655XS (2) 88 jm/jh 1/ 7

S.F. 40 returns. However, if a husband and wife file separate returns 1 and have a combined net income of thirteen thousand five 2 hundred dollars or less, neither spouse shall receive the 3 benefit of this paragraph, if one spouse has a net operating 4 loss and elects to carry back or carry forward the loss as 5 provided in section 422.9, subsection 3 . A person who is 6 claimed as a dependent by another person as defined in section 7 422.12 shall not receive the benefit of this subsection if 8 the person claiming the dependent has net income exceeding 9 thirteen thousand five hundred dollars or nine thousand dollars 10 as applicable or the person claiming the dependent and the 11 person’s spouse have combined net income exceeding thirteen 12 thousand five hundred dollars or nine thousand dollars as 13 applicable. 14 Sec. 3. Section 422.5, subsection 3, Code 2019, is amended 15 by adding the following new paragraph: 16 NEW PARAGRAPH . c. (1) For purposes of this subsection, 17 net income includes all amounts of pensions or other retirement 18 income, except for military retirement pay excluded under 19 section 422.7, subsection 31A, paragraph “a” , or section 422.7, 20 subsection 31B, paragraph “a” , and except for retirement income 21 excluded under section 422.7, subsection 31C, received from any 22 source which is not taxable under this division as a result 23 of the government pension exclusions in section 422.7, or any 24 other state law. 25 (2) This paragraph “c” is repealed January 1, 2023. 26 Sec. 4. Section 422.5, subsection 3B, paragraph a, Code 27 2019, is amended to read as follows: 28 a. The tax shall not be imposed on a resident or nonresident 29 who is at least sixty-five years old on December 31 of 30 the tax year and whose net income, as defined in section 31 422.7 , is thirty-two thousand dollars or less in the case 32 of married persons filing jointly or filing separately on a 33 combined return, heads of household, and surviving spouses or 34 twenty-four thousand dollars or less in the case of all other 35 -2- LSB 1655XS (2) 88 jm/jh 2/ 7

S.F. 40 persons; but in the event that the payment of tax under this 1 division would reduce the net income to less than thirty-two 2 thousand dollars or twenty-four thousand dollars as applicable, 3 then the tax shall be reduced to that amount which would result 4 in allowing the taxpayer to retain a net income of thirty-two 5 thousand dollars or twenty-four thousand dollars as applicable. 6 The preceding sentence does not apply to estates or trusts. 7 For the purpose of this subsection , the entire net income, 8 including any part of the net income not allocated to Iowa, 9 shall be taken into account. For purposes of this subsection , 10 net income includes all amounts of pensions or other retirement 11 income, except for military retirement pay excluded under 12 section 422.7, subsection 31A , paragraph “a” , or section 422.7, 13 subsection 31B , paragraph “a” , received from any source which is 14 not taxable under this division as a result of the government 15 pension exclusions in section 422.7 , or any other state law. 16 If the combined net income of a husband and wife exceeds 17 thirty-two thousand dollars, neither of them shall receive the 18 benefit of this subsection , and it is immaterial whether they 19 file a joint return or separate returns. However, if a husband 20 and wife file separate returns and have a combined net income 21 of thirty-two thousand dollars or less, neither spouse shall 22 receive the benefit of this paragraph, if one spouse has a net 23 operating loss and elects to carry back or carry forward the 24 loss as provided in section 422.9, subsection 3 . A person 25 who is claimed as a dependent by another person as defined in 26 section 422.12 shall not receive the benefit of this subsection 27 if the person claiming the dependent has net income exceeding 28 thirty-two thousand dollars or twenty-four thousand dollars 29 as applicable or the person claiming the dependent and the 30 person’s spouse have combined net income exceeding thirty-two 31 thousand dollars or twenty-four thousand dollars as applicable. 32 Sec. 5. Section 422.5, subsection 3B, Code 2019, is amended 33 by adding the following new paragraph: 34 NEW PARAGRAPH . d. (1) For purposes of this subsection, 35 -3- LSB 1655XS (2) 88 jm/jh 3/ 7

S.F. 40 net income includes all amounts of pensions or other retirement 1 income, except for military retirement pay excluded under 2 section 422.7, subsection 31A, paragraph “a” , or section 422.7, 3 subsection 31B, paragraph “a” , and except for retirement income 4 excluded under section 422.7, subsection 31C, received from any 5 source which is not taxable under this division as a result 6 of the government pension exclusions in section 422.7, or any 7 other state law. 8 (2) This paragraph “d” is repealed January 1, 2023. 9 Sec. 6. Section 422.7, subsection 31, Code 2019, is amended 10 to read as follows: 11 31. a. For a person who is disabled, or is fifty-five 12 years of age or older, or is the surviving spouse of an 13 individual or a survivor having an insurable interest in an 14 individual who would have qualified for the exemption under 15 this subsection for the tax year, subtract, to the extent 16 included, the total amount of a governmental or other pension 17 or retirement pay, including, but not limited to, defined 18 benefit or defined contribution plans, annuities, individual 19 retirement accounts, plans maintained or contributed to by an 20 employer, or maintained or contributed to by a self-employed 21 person as an employer, and deferred compensation plans or any 22 earnings attributable to the deferred compensation plans, up 23 to a maximum of six thousand dollars for a person, other than a 24 husband or wife, who files a separate state income tax return 25 and up to a maximum of twelve thousand dollars for a husband 26 and wife who file a joint state income tax return. However, a 27 surviving spouse who is not disabled or fifty-five years of age 28 or older can only exclude the amount of pension or retirement 29 pay received as a result of the death of the other spouse. A 30 husband and wife filing separate state income tax returns or 31 separately on a combined state return are allowed a combined 32 maximum exclusion under this subsection of up to twelve 33 thousand dollars. The twelve thousand dollar exclusion shall 34 be allocated to the husband or wife in the proportion that each 35 -4- LSB 1655XS (2) 88 jm/jh 4/ 7

S.F. 40 spouse’s respective pension and retirement pay received bears 1 to total combined pension and retirement pay received. 2 b. This subsection is repealed January 1, 2023. 3 Sec. 7. Section 422.7, subsection 31A, Code 2019, is amended 4 by adding the following new paragraph: 5 NEW PARAGRAPH . c. This section is repealed January 1, 2023. 6 Sec. 8. Section 422.7, subsection 31B, Code 2019, is amended 7 by adding the following new paragraph: 8 NEW PARAGRAPH . c. This subsection is repealed January 1, 9 2023. 10 Sec. 9. Section 422.7, Code 2019, is amended by adding the 11 following new subsection: 12 NEW SUBSECTION . 31C. a. (1) For tax years beginning 13 in the 2019 calendar year, subtract, to the extent included, 14 twenty percent of retirement income received by a taxpayer 15 remaining after the subtractions in subsections 31, 31A, and 16 31B. 17 (2) For tax years beginning in the 2020 calendar year, 18 subtract, to the extent included, forty percent of retirement 19 income received by a taxpayer remaining after the subtractions 20 in subsections 31, 31A, and 31B. 21 (3) For tax years beginning in the 2021 calendar year, 22 subtract, to the extent included, sixty percent of retirement 23 income received by a taxpayer remaining after the subtractions 24 in subsections 31, 31A, and 31B. 25 (4) For tax years beginning in the 2022 calendar year, 26 subtract, to the extent included, eighty percent of retirement 27 income received by a taxpayer remaining after the subtractions 28 in subsections 31, 31A, and 31B. 29 (5) For tax years beginning on or after January 1, 2023, 30 subtract, to the extent included, retirement income received 31 by a taxpayer. 32 b. For purposes of this subsection, “retirement income” 33 means a governmental or other pension or retirement pay, 34 including but not limited to defined benefit or defined 35 -5- LSB 1655XS (2) 88 jm/jh 5/ 7

S.F. 40 contribution plans, annuities, individual retirement accounts, 1 plans maintained or contributed to by an employer, or 2 maintained or contributed to by a self-employed person as an 3 employer, and deferred compensation plans or any earnings 4 attributable to the deferred compensation plans. “Retirement 5 income” includes amounts received as survivor benefits by a 6 taxpayer from the federal government pursuant to 10 U.S.C 7 §1447, et seq. 8 Sec. 10. RETROACTIVE APPLICABILITY. This Act applies 9 retroactively to January 1, 2019, for tax years beginning on 10 or after that date. 11 EXPLANATION 12 The inclusion of this explanation does not constitute agreement with 13 the explanation’s substance by the members of the general assembly. 14 This bill relates to the exclusion of retirement income from 15 the computation of net income for purposes of the individual 16 income tax. 17 Under current law, a taxpayer may exclude all retirement 18 pay, including certain survivor benefits, received from the 19 federal government for military service performed in the armed 20 forces, the armed forces military reserve, or national guard. 21 In addition, a taxpayer who is disabled, who is at least 55 22 years of age, or who is the surviving spouse or other specified 23 survivor of that qualifying taxpayer, may exclude a maximum 24 of $6,000 of other retirement income ($12,000 for married 25 couples). 26 The bill strikes a provision permitting moneys in the 27 taxpayer relief fund to be used for increases in the general 28 retirement income exclusions in 422.7(31) because the bill 29 provides for a complete exclusion of such retirement income. 30 The bill phases in over a five-year period the complete 31 exclusion from the individual income tax of a taxpayer’s 32 retirement income remaining after the two exclusions referenced 33 above. The percentage of this retirement income that is 34 excluded for tax years beginning in 2019, 2020, 2021, and 35 -6- LSB 1655XS (2) 88 jm/jh 6/ 7

S.F. 40 2022, is 20 percent, 40 percent, 60 percent, and 80 percent, 1 respectively. For tax years beginning in 2023 or later, 100 2 percent of a taxpayer’s retirement income will be excluded from 3 the individual income tax. 4 The bill also excludes this retirement income from the 5 calculation of net income for purposes of determining whether 6 or not a taxpayer’s net income exceeds the amount at which the 7 individual income tax will not be imposed pursuant to Code 8 section 422.5(3) or Code section 422.5(3B), and for which an 9 individual income tax return is not required to be filed, and 10 for purposes of calculating the alternate tax in Code section 11 422.5, and further provides that any retirement income excluded 12 from the individual income tax will not be added back to these 13 calculations for tax years beginning in 2023 or later. 14 The bill defines “retirement income” for purposes of the 15 exclusion. 16 The bill applies retroactively to January 1, 2019, for tax 17 years beginning on or after that date. 18 -7- LSB 1655XS (2) 88 jm/jh 7/ 7